The U.S.
economy has shown remarkable resilience: neither the coronavirus pandemic nor
the energy crisis caused a recession like 2008, let alone the crash of 1929.
Could
the Fed have learned from past mistakes and put a definitive end to deep
recessions and financial storms?
Unfortunately,
this is far from being the case. The “successful” overcoming of these
problems has not resulted from a brilliant strategy but from indebtedness: from
$23.2 trillion in the first quarter of 2020, total public debt soared to $33.1
trillion.
To put
it into perspective, this amount exceeds the combined economies of China,
Japan, Germany, India, and the United Kingdom. On an individual basis, each
American owes slightly over $99,000.
Obviously,
this amount will never be repaid unless the dollar is devalued by 60-80%.
Still, investors don’t seem to care much as long as the U.S. government meets
its interest obligations.
And
thanks to the Fed’s actions, they have seriously stepped up. By the end of
fiscal year 2023, which concludes at the end of September, net interest expense
is projected to reach approximately $663 billion.
By
comparison, they were $476 billion in 2022, up $187 billion, representing
year-over-year growth of 40%. Is this the Bidenomics miracle we’ve been hearing
about?
Howbeit,
in the next year, debt spending is expected to exceed expenditures on pension
insurance, disability insurance, unemployment compensation, and food
assistance.
Looking
ahead, by 2029, net interest expense will exceed defense spending. It is clear
that such a system cannot be sustained indefinitely, and eventually, the bubble
will burst.
One of
the few assets that could partially protect the savings from this scenario
could be gold (XAUUSD).
So why
do investors continue to purchase US Treasuries?
First,
because so far, the United States has never defaulted on its payments, and the
country continues to lead the world economy. In other words, there is still a
belief in the “too big to fail” principle.
Second,
U.S. government bonds continue to represent the standard method of settling international transactions, accounting for more than half of all foreign exchange
reserves held by sovereigns worldwide.
Therefore,
it is in no one’s interest to collapse the system. Instead, we may see a
gradual reduction of the instrument in countries’ portfolios, but later, after
the current crisis erupts.
What
should be the strategy in the coming months?
Although
the U.S. debt bubble
continues to rise, we should not expect an immediate burst, as the actual
preconditions are not in place. What we could see instead is a financial
crisis.
As the
Fed continues to fight inflation by raising rates, household and business
spending is rising, putting downward pressure on consumer demand and investment
programs.
This
will eventually lead to a fall in profits and a turnaround in the market, forcing the regulator to change its restrictive monetary
policy stance. As a result, demand for bonds could rise, as could prices.
Yet,
given all the problems mentioned, it would be prudent to stick to 2-5 year
Treasuries. But before jumping on this boat, analysts recommend waiting for
macroeconomic signs of an economic slowdown.